When an Investor Uses the Equity Method to Account for Investments

question 120

Multiple Choice

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as:

• A) Dividend income.
• B) A deduction from the investor's share of the investee's profits.
• C) A deduction from the investment account.
• D) A deduction from the stockholders' equity account, dividends to shareholders.

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Definitions:

Kinked Demand Curve

A market theory that suggests prices have a tendency to remain stable because competitors will match price decreases but not price increases.

Cutthroat Competition

An extremely competitive market situation where competitors use aggressive tactics to undercut each other's prices, leading to very low profit margins.

Sticky Prices

A situation in economics where the prices of goods and services are slow to respond to changes in the supply and demand.

Herfindahl-Hirschman Index

A measure of market concentration to assess the level of competition within an industry.